To solve the problem, we will go step by step through each part.
a. Adjusting Entry for Uncollectible Accounts
1. Calculate Bad Debt Expense The bad debt expense is estimated at 1/4 of 1% of sales.
- Sales: $3,200,000
- Bad Debt Expense = Sales × (1/4 of 1%)
- = $3,200,000 × 0.0025 (which is 1/4 of 1% or 0.0025)
- = $8,000
2. Determine the amount of the adjusting entry for uncollectible accounts The Allowance for Doubtful Accounts currently has a debit balance of $6,500. To adjust to the required balance, we need to bring the Allowance for Doubtful Accounts account to the desired credit balance:
- Required balance in Allowance for Doubtful Accounts = $8,000 (calculated bad debt expense)
- Current balance = $6,500 (debit, so we need to convert it to a credit)
- Required adjustment = Desired balance - Current balance
- Required adjustment = $8,000 - (-$6,500)
- Required adjustment = $8,000 + $6,500
- Required adjustment = $14,500
So, the adjusting entry for uncollectible accounts is:
Fill in the blank 1: $14,500
b. Adjusted Balances
1. Adjusted Allowance for Doubtful Accounts After making the adjusting entry of $14,500, the new balance in Allowance for Doubtful Accounts will be:
- Existing balance: $6,500 debit
- Adjustment: $14,500 credit
To calculate the adjusted balance, we convert the initial $6,500 debit to a credit (which would increase the allowance):
- Allowance after adjustment = $14,500 – $6,500 = $8,000 credit
Therefore, the adjusted balance for Allowance for Doubtful Accounts will be:
Fill in the blank 3: $8,000
2. Adjusted Bad Debt Expense The Bad Debt Expense recorded is the same as calculated above since we are not changing anything. Therefore it will also be:
Fill in the blank 4: $8,000
3. Accounts Receivable Balance The Accounts Receivable balance remains unchanged and stays:
Fill in the blank 2: $710,000
Final Balances:
- Accounts Receivable: $710,000
- Allowance for Doubtful Accounts: $8,000
- Bad Debt Expense: $8,000
c. Net Realizable Value of Accounts Receivable
The net realizable value of accounts receivable is calculated as:
\[ \text{Net Realizable Value} = \text{Accounts Receivable} - \text{Allowance for Doubtful Accounts} \]
\[ \text{Net Realizable Value} = 710,000 - 8,000 = 702,000 \]
Fill in the blank 1: $702,000
Summary of Answers
- Adjusting Entry: $14,500
- Accounts Receivable: $710,000
- Allowance for Doubtful Accounts: $8,000
- Bad Debt Expense: $8,000
- Net Realizable Value: $702,000